Complexity around directors’ duties owed to Irish insurers

The duties which apply to an Irish director were codified in the Companies Act and were the subject of a lot of market commentary at the time. While, for directors of non-regulated companies, this codification clarified the extent of those directors’ obligations, the position for directors of Irish insurance companies remains more complex.

We can expect this to increase as the senior executive accountability regime (SEAR) is implemented and comes into effect and the regulator, the Central Bank of Ireland (CBI), makes anticipated changes to the 2012 Consumer Protection Code (CPC) to account for, amongst other things, the digitisation of financial services.

Directors’ duties in general

The duties and responsibilities of the directors of Irish companies which are not regulated or listed derive from a number of sources including the Companies Act, the company’s own constitution, common law fiduciary duties and nominee arrangements, as well as standalone regulatory regimes on topics such as the environment, health and safety, competition, data protection, tax and criminal law.

These duties are owed primarily to the company. Directors must also have regard to the interests of the company’s shareholders and members, subject to their primary obligation to act in the interests of the company; to employees; and to creditors in certain circumstances. Directors who are nominees of particular shareholders or members may also have regard to the interests of that shareholder or member, but again this is subject to the primary obligation to act in the interests of the company.

The Companies Act sets out the following duties of directors:

• an obligation to acknowledge their duties and obligations when consenting to act as a director;
• a duty to ensure the company complies with the Companies Act;
• a duty to ensure the company secretary is appropriately skilled for the role;
• obligations in relation to certain duties of disclosure and the keeping of accounting records, including where certain thresholds are met having a compliance statement in the directors' annual report which forms part of the company's financial statements; and
• a duty to comply with the codified fiduciary duties.

Emphasis tends to be put on the common law fiduciary duties of directors, which were codified for the first time in the Companies Act, as this body of duties has developed through case law over a long number of years before being codified. These codified duties are:

• to act in good faith in what the director considers to be the interests of the company;
• to act honestly and responsibly in relation to the conduct of the affairs of the company;
• to act in accordance with the company's constitution and to use his or her powers only for the purposes allowed by law;
• not to use company property, information or opportunities for his or anyone else's benefit unless permitted or released from the duty;
• not to fetter exercise of independent judgment unless permitted or released or the director believes in good faith that it is in the company’s interest;
• to avoid conflicts of interest between the director's duty to the company and their other interests (including personal interests) unless the director is released from this duty;
• to exercise the care, skill and diligence which would be exercised in the same circumstances by a reasonable person having both the knowledge and experience that may reasonably be expected of a person in the same position as the director and with the knowledge and experience which the director possesses. This means that the standard by which a director is to be judged is effectively a quasi-objective-subjective standard;
• to have regard to the interests of the company's employees in general; and
• to have regard to the interests of the company's shareholders.

Under the Companies Act, civil and/or criminal recourse can be had to directors in respect of unfair preference transactions and other issues on insolvency; fraudulent or reckless trading; fraudulent disposition of company property; and failure to keep adequate accounting records.

Directors’ duties owed to insurance companies

The general directors’ duties set out in the Companies Act apply to directors of Irish insurance undertakings (‘insurers’). However, directors of Irish insurers are also subject to additional obligations which apply to them as a result of the insurer’s regulated status. The general position derives from the European Union (Insurance and Reinsurance) Regulations 2015 (’2015 Regs’), which transposed the Solvency II Directive in Ireland and which provide that the board of directors of insurance companies has the ultimate responsibility for compliance with the 2015 Regs and any other applicable Irish laws.

The Consumer Protection Code

The CBI’s Consumer Protection Code (CPC) requires regulated financial firms, including insurers, to “act honestly, fairly and professionally in the best interests of its customers”. This can be contrasted with the general Companies Act requirement that directors of a company must have regard to the interests of creditors only when a company becomes insolvent. The CPC imposes a general obligation on insurance companies, acting through their board of directors, to act in the best interest of policyholders – who are effectively creditors of the insurance company – at all times and not just when the insurer is insolvent.  

Insurance corporate governance requirements

The 2015 Corporate Governance Requirements for Insurance Undertakings (CGR 2015) provides that the “board retains primary responsibility for corporate governance within the insurance undertaking at all times”. It also provides that the independent non-executive directors (INEDs) of the insurer should provide “an independent challenge to the executive directors of the board” based on their independent and objective viewpoint.

The role of INEDs under the chair’s leadership, as set out in CGR 2015, includes:

• to ensure that there is an effective executive team in place;
• to participate actively in constructively challenging and developing strategies proposed by the executive team;
• to participate actively in the board’s decision-making process;
• to participate actively in board committees (where established); and
• to exercise appropriate oversight over execution by the executive team of the agreed strategies, goals and objectives and to monitor reporting of performance.

CGR 2015 also sets out the role of executive directors, led by the chief executive officer, is to propose strategies to the board and, following challenging board scrutiny, to execute the agreed strategies to the highest possible standards.

While the requirements placed on directors under CGR 2015 are relatively high-level, if directors of Irish insurers do not meet those requirements they could be subject to administrative sanctions by the CBI pursuant to its powers under the 1942 Central Bank Act (as amended). If the CBI makes a determination that a director concerned in the management of an insurer is participating or has participated in the commission by the insurer of a “prescribed contravention” of CGR 2015, it may caution or reprimand the director, impose a monetary penalty or disqualify that person from being concerned in the management of a regulated financial services provider for a specified period.

Before such a penalty can be imposed on the director of an insurer, the CBI must first have determined that the insurance undertaking itself has committed a “prescribed contravention” of CGR 2015.

Future developments

The senior executive accountability regime

There has been a huge amount of commentary in the Irish market about the senior executive accountability regime and its accompanying individual accountability framework (together, SEAR) without any concrete details as to what that framework will look like. While the general scheme of the heads of bill of the Central Bank (Individual Accountability Framework) Bill (‘Heads of Bill’) published on 28 July 2021 now provides this, it does not set out the legislative text which will be in the bill itself - rather, it provides a description of what will be in the bill and an explanation of the proposed approach. However, we can discern the high level principles of SEAR and how it will operate from the Heads of BIll.

The Heads of Bill will impose a legal duty on individuals performing senior executive functions (SEFs) in insurance undertakings to take reasonable steps to avoid their firm committing a “prescribed contravention” in relation to the areas of the business for which they are individually responsible. An individual will breach this legal duty where:

• at a time when the individual was performing a SEF, the insurance undertaking committed or continued to commit a prescribed contravention;
• the individual was, at that time, responsible for the business area relevant to that prescribed contravention; and
• the individual did not take reasonable steps to avoid the prescribed contravention occurring or continuing.

The Heads of Bill provide that breach of this duty will itself be a prescribed contravention and therefore enforceable against that individual by way of administrative sanction so obviously this is extremely relevant to directors and other holders of pre-approval controlled functions which hold SEFs. The CBI will be required, when assessing whether the individual took reasonable steps to avoid the prescribed contravention occurring or continuing, to have regard to all relevant circumstances and to provide a non-exhaustive list of examples of those circumstances. The level of knowledge which the CBI will assume from the SEF will be a mixed objective/subjective standard in that it will assume a reasonable level of knowledge that a person performing that function will have but will also take into consideration the particular level of knowledge and experience of that senior executive. Importantly, this test is consistent with the test which is effectively applied in the Companies Act. 

The Heads of Bill also sets out new conduct standards which will apply. These are catered for in standards of business, common conduct standards and additional conduct standards for persons in senior roles.

The standards of business are intended to create a single reference point setting out in clear and simple terms the conduct standards that all regulated financial services providers must meet. Breach of the standards of business will be a prescribed contravention and therefore enforceable against an insurance undertaking itself.

The common conduct standards are an additional set of standards which will be applied to persons undertaking controlled functions and pre-approval controlled functions in an insurance undertaking. The introduction of the common conduct standards is intended to provide clarity as to the standards of behaviour the CBI expects of individuals working in the financial services industry. A breach of the common conduct standards will be a prescribed contravention and the CBI can take direct enforcement action against an individual on account of that breach. While it remains to be seen how common conduct standards will be applied by the CBI, this appears to mean that the CBI can initiate administrative sanctions procedures against persons carrying out a controlled function which will obviously include directors.

The additional conduct standards are applied to persons carrying out pre-approval controlled functions and persons who have a significant influence on the conduct of a regulated financial services provider. These are additional obligations over and above the common conduct standards. A breach of the additional conduct standards will be a prescribed contravention and so the CBI can apply administrative sanctions to an individual which breaches those standards.

A breach of the common conduct standards or the additional conduct standards will permit the CBI to take appropriate action under the fitness and probity regime or the administrative sanction regime. If a person is found not to be fit and proper, the CBI has the power to issue a prohibition notice preventing the person from performing a controlled function or restricting them in the performance of some or all controlled functions.

The Heads of Bill provides that fines will be dissuasive and proportionate but individuals can be fined up to €1 million by the CBI under an administrative sanction procedure.

Diversified skillsets

The CBI has confirmed that it will amend the CPC to take account of the digitisation of financial services, amongst other things. The requirement to do this has become even more pronounced in the context of insurance following the Covid-19 pandemic, which has increased the pace of digitisation of insurance.

The impact of this is that boards of directors of insurance companies will need to have appropriate digital skillsets to meet the challenges which these new business models will generate. However, this is consistent with the broader theme of increasing diversity of skillsets on boards of directors of insurance companies. The CBI will not approve applicants to undertake or continue to undertake directorship roles going forward without them having the appropriate skillset which ensures a diversified skillset on the board of directors of an insurance company. While this of itself will not increase the duties of directors of insurance companies, the changing business environment and business models may make it more difficult for directors to satisfy the obligations imposed on them to meet their directors duties.

Importantly, the quasi subjective-objective test applied by the Companies Acts and SEAR will mean that directors which hold these new skillsets will be judged by the reasonbale standards of a director who has the same skills as them.